Multiple Dimensions of Proximity in Explaining Firm Financial Performance in the Context of Industrial Agglomeration

Abstract

The proximity between firms is an important research topic in the field of industrial agglomeration and alliance networks. Traditionally, in research on economic geography, proximity generally refers to geographical proximity. However, with the inclusion of perspectives such as organizational theory, social network theory, and resource-based view (RBV), proximity has a much richer connotation. According to the analytical study on proximity, proximity can be divided into multiple dimensions including geographic, organizational, technological, institutional, cognitive, cultural and social. Firstly, these proximity dimensions have a certain degree of overlap and confusion, which obscures the boundary and connotation of the proximity concept and is not conducive to the establishment of a systematic analysis framework and research agenda of proximity. Also, the current empirical studies on industrial agglomeration mainly evaluate the influence of proximity from a single dimension. For example, economic geographers tend to pay attention to the geographical proximity between economic participants, but lack focus on their technological characteristics and organizational connections; sociologists mainly focus on the interaction network structure between participants, but to a large extent ignore their internal capabilities and regional factors; scholars in the field of strategic management and economics tend to emphasize the technological and organizational dimension of proximity but ignore the geographical dimension. These proximity dimensions, whether used as a coordination mechanism or a capacity-building mechanism, affect firm performance in a complementary or alternative relationship, therefore they cannot be examined and evaluated in isolation.

Given the drawbacks in the current research fields, this study aims to expand and strengthen the proximity research agenda in the context of industrial agglomeration from two aspects, namely the classification of proximity dimensions and their effects on firm performance separately and in combination. This study takes firms in industrial agglomeration as the research unit and extracts three conceptually well-defined proximity dimensions based on RBV, social capital, and agglomeration economies, namely technological, social, and geographical proximity; the aim is to establish a research framework for the classification of proximity concepts. Drawing on firm technological capabilities and social networks, this study further discusses how different dimensions of proximity affect its performance in industrial agglomeration. Specifically, this study uses listed firms in the stock exchanges of Mainland China in the information technology (IT) industry as the research sample, with firm financial data, patent data, and the large dataset of employee mobility patterns used to discuss the effects and relationships regarding geographical, technological, and organizational proximities in three sub-studies accordingly. Sub-study 1 discusses the agglomeration effect on firms concerning geographical proximity, based on which sub-studies 2 and 3 examine the impact of technological and organizational proximity on firm performance respectively and discuss the moderating effect of geographical proximity on two other proximity dimensions. This research not only explores the relationships between different proximity dimensions in the context of industrial agglomeration through a multi-dimensional proximity perspective, but also provides empirical evidence for the proximity in explaining firm performance.

The sub-study 1 elaborates the mechanism of the effect of geographical proximity on industrial performance under industrial agglomeration from the agglomeration economies perspective. Firstly, based on the external effects of agglomeration, this study puts forward the research hypothesis regarding the impact of the geographical proximity of firms in all sectors of the IT industry on the individual firm performance. Since the effect of geographical proximity (external economies of scale) is achieved through the sharing of firm knowledge and resources, the industry sectors of external firms are critical to the agglomeration effect. Meanwhile, there are still different views on what type of industrial structure is more conducive to the agglomeration effect. This study therefore further explores the impact of the geographical proximity of external actors in the same sub-sector and in different sub-sectors on firm performance. Also, since technological capabilities of a firm can also affect the agglomeration benefits that it can gain, this study further discusses how technological capabilities of a firm can moderate the effect of the geographical proximity between the firm and external actors on its performance. The research results show that: 1) The overall geographical proximity does not contribute to the improvement of firm performance; 2) The geographical proximity of firms within the same sub-sector can significantly promote firm performance, while the geographical proximity of firms in different sub-sectors has no significant effect; 3) The technological capabilities of a firm have a negative moderating effect on the relationship between geographical proximity and firm performance.

The sub-study 2 examines the impact of technological proximity and geographical proximity on firm performance from the technological diversity perspective. This study proposes research hypotheses concerning the effects of internal technological diversity and external technological proximity on firm performance and empirically evaluates these hypotheses. Furthermore, this sub-study examines the moderating effects of geographical proximity on technological diversity and technological proximity, respectively. The main research conclusions include: 1) In industrial agglomeration, the technological diversity of the firm does not improve its performance; 2) The technological proximity between the firm and external agglomeration actors helps to improve its performance; 3) Geographical proximity can strengthen the positive relationship between technological proximity and firm performance, which indicates that there is a complementary relationship between geographical proximity and technological proximity.

The sub-study 3, based on social capital, investigates the impact of organizational proximity and geographical proximity on firm performance. Since the existing literature does not adequately discuss the concept of organizational proximity, and also there are conflicting views on the relationship between organizational proximity and firm performance, this study explores the concept and impact of organizational proximity among firms in the context of industrial agglomeration. At the same time, the moderating effect of geographical proximity is discussed. First, this study examines organizational proximity from the relational and structural aspects (i.e., relational proximity and structural proximity) according to the relational and structural dimensions of social capital. Based on this classification, this sub-study proposes the research hypotheses associated with relational proximity and structural proximity and empirically evaluates the impact of two dimensions of organizational proximity on firm performance. Further, the study introduces geographical proximity to test the moderating effect of geographical proximity on organizational proximity. The research results suggest that: 1) Relational proximity and structural proximity have different effects on firm performance. Among them, structural proximity has a significant and positive impact on firm performance while relationship proximity has no significant impact; 2) Geographical proximity can weaken the positive effect of structural proximity on firm performance. Therefore, there is a substitute relationship between geographical proximity and organizational proximity.

The key contributions of this study to existing research are as follows. 1) This study establishes the classification framework of proximity dimensions at the firm level, including geographical, technological, and organizational proximity. 2) Based on the industrial sectors of IT, this study examines the geographical proximity at intra-sector and inter-sector industrial levels and discusses the impact of the intra-sector and inter-sector geographical proximity on the economic benefits of agglomeration. The results show that the benefits of industrial agglomeration are engendered mainly by the geographical proximity within the same sub-sector. 3) The analysis on the impact of technological proximity to external participants on firm performance provides empirical evidence for the current research, and the discussion on the dual effects of technological proximity and geographical proximity further verifies the complementarity between the two dimensions. 4) From the social capital perspective, this study divides organizational proximity into two aspects: relational proximity and structural proximity, and then discusses the impact of organizational and geographical proximity on firm performance, supplementing the current research on organizational proximity in industrial agglomeration. Furthermore, this study discusses the dual effects of organizational proximity and geographical proximity, which provides empirical evidence for the current research on the interaction effect of different dimensions of proximity. 5) With respect to the methodology, this study utilizes the mobility patterns of the employees of firms to build an interactive network among these firms. The proposed method of constructing firm networks based on big data approach can better reflect the real interactions and cooperative relationships among firms. Furthermore, this study adopts cluster analysis technique to identify industrial agglomerations by using firm locations at the geographic coordinate system. This method avoids the restriction of administrative boundaries in traditional methods and is suitable for the scenario with a large number of firms, allowing for identifying industrial agglomerations with high flexibility.

Date of Award	21 Jul 2021
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Xiaoling ZHANG (Supervisor), Weihua Zhou (Supervisor) & Weihua Zhou (External Supervisor)